Private capital giants from across the Atlantic are jumping into the UK’s booming pension-risk transfer market, with insurers backed by Brookfield Corp. and Apollo Global Management Inc. announcing deals valued at a combined $10.7 billion in the past month.
As British businesses ranging from Boots to RSA and NatWest Group Plc offload their retirement liabilities to insurers to focus on their core businesses, the UK’s £1.4 trillion ($1.8 trillion) defined-benefit pension funds have become a hot target for firms including Apollo.
The pension pools, apart from serving as a great source of capital that can be deployed in corporate bonds, infrastructure projects and other higher-yielding markets such as private credit, also generate recurring management and performance fees, making the buyout particularly lucrative. Demand for such deals is expected to reach £500 billion through 2033, according to consulting firm LCP.
While private capital groups argue that listed insurers lack capacity to absorb all the assets companies will look to offload in the coming years, the transfers are raising eyebrows at regulatory bodies, who are concerned that the ownerships could exacerbate market stress.
In a demonstration of how hot the market is getting, the premium paid by Brookfield shows the firm didn’t take any chances to secure its spot in the world’s fourth-largest retirement market.
Brookfield Wealth Solutions, which is led by long-time executive Sachin Shah, shelled out a 75% premium for London-listed insurer Just Group Plc.
BWS plans to fold its recently approved UK insurance arm Blumont into Just Group, targeting annual buyouts of as much as £50 billion in the coming years. The pace would see it leapfrog large players like Legal & General Group Plc, which seeks to write a total £65 billion through 2028.
After years of lurking in the background, Apollo-backed Athora also came to the fore with its acquisition of Pension Insurance Corp. The firm’s previous owners included a vehicle backed by billionaire Richemont Chairman Johann Rupert, HPS Investment Partners, CVC Capital Partners Plc, and a unit of Abu Dhabi Investment Authority.
In the time between the two transactions, Blackstone Inc. inked a partnership with L&G to originate investment-grade private credit deals for the UK insurer’s annuities business.
There could be more in the pipeline. Utmost Group, another UK insurer, is considering a sale of its UK life and pensions business, which entered the risk-transfer market last year, Bloomberg News has reported. The firm is currently backed by Oaktree Capital Management.
Faith in Economy
UK Chancellor of the Exchequer Rachel Reeves welcomed both Brookfield’s and Athora’s arrival in the market, taking it as signs of their “faith in the UK economy.”
The firms’ greater access to higher-yielding private markets investments could lead to lower prices companies have to pay to insurers to take on their liabilities, according to Andrew Ward, head of risk transfer at consulting firm Mercer UK. “For now at least, there is strong competition for business despite the potential consolidation of Just and Blumont,” he said.
British regulators, meanwhile, appear less sanguine.
The Bank of England’s Prudential Regulation Authority has warned that the growth in insurers shipping off liabilities to overseas reinsurers and institutions that made illiquid bets could threaten the stability of the financial system.
The BOE’s concern lies in a scenario where PE-sponsored corporate assets fall sharply. Life insurance subsidiaries are increasingly holding debt sponsored by the same PE firm that also owns the insurer.
In such a scenario, the firms could see a fall in solvency ratios that triggers termination of reinsurance contracts, meaning the original insurer must take on the risk again — known as a recapture event. The subsequent increase in capital requirements would force insurers to sell assets at steep discounts to raise cash, exacerbating market stress.
The central bank is expected to unveil results of a stress test that gauges insurers’ exposure to reinsurers through corporate pension deals in the fourth quarter of the year.
Buyout funds’ ownership of life insurance assets has drawn scrutiny from European regulators for another reason. The watchdogs are concerned that the investors’ limited ownership periods may not be suited to the long-term nature of the industry.
There have also been examples of PE-owned firms running into financial difficulty.
Cinven-backed Italian life insurer Eurovita went into administration in 2023 after it fell short on solvency requirements when bond-market volatility hit portfolios and clients were seeking to pull money.
The coming decade will see the peak of UK risk-transfer deals as companies wind down their defined-benefit programs. But that won’t necessarily mean fewer opportunities for alternative asset managers to collect premiums and deploy capital.
The pension risk-transfer market is “finite but there are other products with significant growth potential in the UK life insurance market in the coming decades, like retail annuities.” said Will Keen-Tomlinson, analyst at Moody’s Ratings. “That’s something Just Group offers as well.”
Written by: Leonard Kehnscherper @Bloomberg
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